When David Ertel became CFO of a university health system a few years ago, he saw right away one of the organization’s greatest strengths was also its greatest potential liability — one of its service lines generated the lion’s share of its revenues and margins. If something were to happen to that line, the organization would be left dangerously exposed.
“We set about creating a series of very tangible work streams to broaden the organization’s geographic footprint to move that service line more broadly into the community with other organizations,” Ertel said last week in a CFO Thought Leader podcast.
Simultaneously, he and the CEO developed a strategy to minimize the risk should that service line see a reduction in business over the next three to five years.
“I realized, given the magnitude of it, it was also a vulnerability of the future,” said Ertel, who today is CFO of Vizient, a member-owned company that helps health care systems access products and services more efficiently and improve their operations and clinical outcomes through data analytics.
Sharing the good and the bad
Ertel said he works with board members and his c-suite colleagues whenever he sees challenges ahead, such as the one he saw at the university health system, because it’s the role of the CFO to be the guiding light on long-term strategy.
“Companies do not move on a dime,” he said. “If those things are identified and need to be addressed, it has to happen over a multi-year period.”
Ertel came to Vizient 18 months go after serving in the CFO role at the university system and one other provider, Einstein Healthcare Network in Philadelphia. Before that, he was on the investment banking side of the healthcare industry at Paine Webber and then Morgan Stanley
“I always had an interest in the health systems themselves, not just the investment banking perspective on them,” he said.
Vizient was created three years ago from a merger of four provider networks, representing almost 320 companies: Voluntary Hospitals of America, Novation, University Health System Consortium, and MedAssets. The company uses its leverage to reduce its customers’ costs on the supply chain side and leverages big data to help them provide better clinical services and improve their operations.
The member-owned aspect of its business model is one of the sources of its strength, because its board members are both users of its services and decision-makers about what would make those services better.
“Its a real alignment of strategy leading to execution,” he said.
The company’s revenue model is largely recurring, through software-as-a-service (SaaS) subscriptions and conventional, multi-year contracts. In addition to its members, it has several thousand unaligned health care providers as customers.
To ensure the company is providing value to its customers every day, he works with IT to maintain a back-up system so there’s minimal disruption to its services should something happen to the network.
“Our customers in essence need to be online with us almost 24-7 in terms of the data pipes that exist,” he said. “So, we’re very focused from a finance and IT perspective on making sure all of those touchpoints are working and if anything ever goes down, from the perspective of either the integrity of that data or the data pipes themselves, we’ve got a plan to get it back up promptly.”
Subscriptions and contracts
One of the benefits of recurring revenue is the visibility it gives you into future business, but it’s crucial for executives always to be looking further ahead for new business.
“The challenge for these types of organizations is not to sit back and rest on your laurels,” he said. “What offerings do you put forward to enhance that and really take advantage of a built-in stickiness? So, it’s a good starting point but it doesn’t change the dynamic that you have to be out there every day.”
Among the financial metrics he looks at regularly are revenue per customer, margin per customer, and earnings before interest, taxes, depreciation amd amortization (EBITDA) margin. On the non-finance side, he looks at member retention, new customers and market share. He’s also just started looking at his company’s net promoter score, which is a measure of people’s attitudes about the company.
“That is and will become an even more important metric,” he said. “The other member-customer satisfaction scores are also important. These ultimately come back to financial metrics, because if you retain a customer, you retain the margin and the revenue. If you get a customer, you gain the margin.”
Ertel said the speed at which technology is changing makes business exciting today, but it also means CFOs have to approach their profession from a strategic perspective.
“It’s really about developing the next set of plans, strategies and working with your teams to execute on them,” he said. “Someone coming from an audit firm, or the internal accounting department, moving up to be a CFO is still a valid [career path], but you’re also seeing a lot of insights that are gained in a professional experience on the outside brought to those roles.”